I am a senior editor at Forbes, covering legal affairs, corporate finance, macroeconomics and the occasional sailing story. I was the Southwest Bureau manager for Forbes in Houston from 1999 to 2003, when I returned home to Connecticut for a Knight fellowship at Yale Law School. Before that I worked for Bloomberg Business News in Houston and the late, great Dallas Times Herald and Houston Post. While I am a Chartered Financial Analyst and have a year of law school under my belt, most of what I know about financial journalism, I learned in Texas.

2/07/2012 @ 11:05AM7,591 views

Mortgage Settlement Talks Look Like Tobacco II

The following post generated a lot of comments, most of them criticizing my conclusion that there was scant evidence robosigning and other illegal activities by mortgage companies actually caused homeowners who were paying their mortgages to be foreclosed upon. Since this appeared, the federal government and attorneys general of 49 states announced a $25 billion settlement with only $1.5 billion to compensate homeowners who lost their homes to foreclosure between 2008 and 2011. Reason: Few if any had an actual legal claim the AGs could pursue on their behalf. For details see post here.

Stop me if you’ve heard this one before: Politically ambitious state attorneys general target an unpopular industry with lawsuits based on creative legal theories that would stand a tough time in court. Their sheer legal might brings the other side to the negotiating table. Talks grind on. Finally a grand bargain is struck that buys the industry some measure of immunity and sends cash sluicing directions that will help the AGs in their political careers.

That’s how the great tobacco settlement went down, and it’s looking like the mortgage settlement is headed the same direction. In both cases, the AGs are seizing upon behavior which looks bad and may technically violate the law, but is hard to link directly to consumer injuries.

Sure, evil tobacco executives extolled the healthy benefits of smoking, but at the same time the nation’s highest medical officer told consumers cigarettes killed. In a government-required label on every pack. So were the lies of tobacco executives the cause of smoking-related injury and death? Or did smokers have something to do with it? Either way it was hard for government lawyers to make the case that smoking cost the state money, after accounting for cigarette taxes and the fact that smokers tend to die quickly and young, diminishing Medicare, Social Security and pension payments.

These are difficult, even ghoulish arguments to make. And so is arguing that robosigning and the other practices in the mortgage industry didn’t really hurt anybody. But where’s the evidence to the contrary?

Take Nevada Attorney General Catherine Cortez Masto’s December lawsuit against Lender Processing Services, DocX and other document-preparation firms. According to the Nevada AG, “the foreclosure crisis has been fueled by two main problems: Chaos and speed.” There’s no mention of the primary cause: Borrowers not paying their mortgages. And while the lawsuit throws around words like “kickbacks” and “forging scheme,” it is notably short on evidence a single homeowner suffered foreclosure while current on his payments.

Instead, the complaint cites “confidential witnesses” who signed thousands of documents a day without “personal knowledge” of their accuracy. What would that “personal knowledge” consist of? A computer record showing the mortgage was in default. The mortgage industry computerized a long time ago, and the “personal knowledge” inside the mortgage-syndication machine is institutional. Lawyers, notaries and county recorders of deeds may cling to the idea that a knowledgeable person, preferably a lawyer, must bless every document in a foreclosure. But where’s the evidence that the computers were wrong, and vast numbers of foreclosures were filed on mortgages weren’t in default?

As they did with the tobacco companies, the AGs attempt to build a case by citing what the loan processors said, not specific actions that hurt consumers. The Nevada case makes much of LPS’s SEC filings stating it doesn’t falsify documents or do other bad things — laying the ground for a barrage of securities-fraud lawsuits when it agrees in a settlement that maybe it did (there are two already). It also accuses LPS of violating Nevada’s consumer-protection laws, without citing any of its customers — banks and investors — who complain of being defrauded.Instead the consumer fraud is a hazy, derivative sort of thing. Consumers weren’t told that the foreclosure processors charged lawyers filing the paperwork against them a $125 fee for accessing their computer database, which Nevada calls a “kickback” but LPS characterizes as an “administrative fee.”

The penalties are stiff, up to $12,000 for each of the tens of thousands of cases of “fraudulent” documents. But with all those confidential witnesses and tens of thousands of illegal foreclosures, why can’t the state cite a single case of a foreclosure that was made in error?

Missouri Attorney General Chris Koster upped the ante yesterday by indicting DocX on 136 counts of criminal fraud, as well as its founder and former president Lorraine Brown, for the same sort of alleged paperwork violations. The criminal complaint says somebody at DocX signed 68 notarized deeds of release under the name of “Linda Green,” and illegally filed them with the “Boone County Recorder of Deeds as though they were genuine.”

News reports suggest the latest iteration of the nationwide mortgage settlement will include principal reductions for people who paid more for their houses than they are currently worth and $2,000 payments for people who stopped paying for their houses and were foreclosed out of them. The big banks are undoubtedly desperate to complete this deal and obtain the legal absolution AGs are uniquely positioned to provide.

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If that is the case, why take it away? I will give you the case of someone who bought a house for $390,000. Paid close to 90,000 in two years. When the payments of $4,600.00/ month became too much, he asked for bank to reduce the payment by modifying the loan. The bank did not, and instead they increased the interest and the payments. After a while , as the owner asked for modification, the foreclosure process was carried out and the 390.000.00 was bought back by the bank itself at an auction that the bank orgabized for $240,000.00, which the owner could have afforded easily. Then six months later, the house was sold to another person for 180,000.00, which the original owner could have paid. My question is that why could not the bank bring down the interest to make the house affordable? Why could they not give the orinal ower the deal that they gave to the new owner? The sad thing is that the banks never have anybody’s interest at heart. They were the problem by selling faulty/ problem ridden loans. And it is no wonder that the most of default came from those sub prime. No defaulting house owner has created the sub prime loans. Mentioning failure to make payments as the main culprit equates to starting a story from the middle and never returning to its beginning, which of course makes it difficult to understand it.

If I borrowed $390,000 to buy stock in WhiffCo and it collapsed to $190,000, would anybody be suggesting I get a principal reduction? If I bought a Bentley with borrowed money and drove it into a tree? Yes the bubble was inflated with easy credit. But every sale involved a human being who thought it was a good idea at the time.

Daniel, your story omits the fact that most appraisals were fraudulent, the assignments of mortgage and the transfer of the notes was not done, the mortgage was not recorded in the name of the (alleged) security holder, and the foreclosing entities have no standing to pursue the real property used by the bank to take money from investors to fund loans. Fraud is fraud, so why should the banks be allowed to take the house? The loans have mostly been extinguished with TARP and bond-insurer money. Your prejudice on behalf of the hedge fund guys you lunch with is showing. Shame on you.

I haven’t lunched with anybody lately with the guts — or stupidity — to go long financials. The hedge-fund types I do talk to favor principal reduction because they bought their mortgages at a discount and that might make the paper perform better and make them a lot of money. Meanwhile, are you suggesting that because my bank got TARP money I should be able to default and live in my house mortgage-free? Sign me up!

How about taking responsibility for a personal debt. That’s something that is RARELY discussed in all this malaise. NO instead, we’ve devolved into a “Victim” mentality. Cant make my mortage payment, must be the bank’s fault that they lent me too much….Never mind that I never took the time to understand why it is I couldnt afford a 700,000 home while making 36,000 a year.

The “blame the borrower” crowd is reviving itself. Did the borrowers collude to raise the LIBOR to force homeowners into higher payments and subsequent default? Did the borrowers commit appraisal fraud? Did the borrowers file false asset and income statements? Did the borrowers fail to transfer the assets into the trusts by the requisite closing dates? Did the borrowers use their notes to pledge to multiple parties to obtain funding two or three times for the same loan? Did the borrowers engage the foreign banks (Deutsche and HSBC) to enter the market and table fund millions of loans that could never be repaid? Did the borrowers sell the securities to pension funds and create “credit default swaps” and “counterparty agreements” and then hold up the Federal Government for $700 billion? I didn’t think so.

And by the way, the government got paid back on tarp and with a nice profit I might add….Question, why do you think Obama praises the bailout of GM on one side of his face and criticeses bank bailouts on the other?

fred, the meltdown is indeed a product of the repeal of Glass-Steagall and the foreign national banks seeking to force the destruction of the dollar as the worlds’ reserve currency. If this was a “subprime problem” (“subprime loans” were only $1.3 trillion), it would have cured long ago. This is a black hole centered around the derivatives (CDO/synthetic CDO’s) problem amounting to $600 trillion. Was this an accident? I think not. The quants figured they could buy enough insurance protection so that when the defaults occurred, they could get the payment stream from the insurers and counterparties. When those people became insolvent, there was no place left to turn except the government. Remember, the TARP was sold to the American people as a way to “restructure” the mortgage markets. After the money was released, the “restructuring” argument went out the window, and the banks used the cash to do everything EXCEPT restructure the obligations. So little time, so much history. I’ve gotta get back to work!